Banks are going crazy for the tech behind bitcoin
Source: Oscar Williams-Grut
Banks are going bananas for blockchain, the technology that underpins bitcoin.
Blockchain can revolutionize mainstream finance by ripping out huge amounts of processing cost, and millions of dollars are flowing into companies building the technology.
A working group of 42 world-leading banks has been set up to establish standard practices, and top banks like UBS, Santander, and Barclays are tinkering with the technology themselves behind closed doors.
Blockchain is technology that uses a distributed ledger and complex cryptography to regulate bitcoin transactions. What that means in practice is if people want to trade or transact with each other online they can do it directly, rather than go through a middleman like a clearing house.
Cutting out the middle man makes things faster and cheaper, so banks are desperate to find a way to adapt the technology to traditional finance. Goldman Sachs says the technology has the potential to change "well, everything."
"The market for private blockchain 24 months ago was zero," says Jeremy Millar, a partner at boutique technology bank Magister Advisors. "Now we’re at a stage in the market where it has already gone into specialisation. This is a market that’s poised to scale incredibly rapidly."
Millar co-authored an extensive report on bitcoin and blockchain technology that came out this week. It's arguably the most extensive overview of the ecosystems surrounding the technology out there.
I got on the phone to him this week to hear how he sees the space evolving and one big take away is just how fast the blockchain space is growing.
"This is the fastest growing market that I have seen in enterprise technology since the internet," says Millar. "Adoption of these projects in the banks is going to be much faster than people think."
Everyone gets a win. It’s not just the uber-geek that gets the benefit.
Millar's report says almost $1 billion (£670 million) has been invested in bitcoin and blockchain-related technology over the past three years. Well-known financial firms like Goldman Sachs, Citi, and Nasdaq are all investing in the technology.
So why are banks moving so fast on blockchain? A big reason, Millar says, is because the benefits of the technology are so wide ranging.
"Everyone gets a win. It’s not just the uber-geek that gets the benefit. The CIO gets to replace very expensive, outdated mainframe infrastructure with something better.
"The business owner gets to release capital ― this is very important. With the new regulations, post-2008 and Basel III, the collateral and capital that’s required against any trade has increased. Reducing settlement windows allows the banks to do more trades or release more capital."
Banks legally have to put cash aside to cover a trade until it's completed. That's to guard against the risk of a settlement house ― the middle man ― rejecting the trade, going bust, or any other potential risk.
But by cutting out the middle man the blockchain makes the settlement period ― the time it takes to complete a trade ― much shorter. That means you can get more bang for your buck from the money set aside to cover the trade, as the efficiency gains theoretically mean you can get more trades done in the same time period.
Millar adds: "The compliance team gets a win too because if everything is cryptographically signed on a blockchain, two things happen. One, you will spot misbehavior in real-time and two, after the fact no one can tamper with the evidence."
Millar expects the blockchain markets rapid development to continue for the foreseeable future thanks to the sheer level of money being pumped into the sector. He also expects more businesses to evolve around the technology, such as blockchain analytics.
"This is the banks internet moment," Millar says. "This is their moment in the sun. All of a sudden being a CTO (chief technology officer) or director of information at a bank is sexy."
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